Cryptocurrencies made waves in 2017 when skyrocketing prices made countless investors millionaires almost overnight. While these digital currencies are gaining acceptance among the general population, there are still crypto skeptics such as Paul Krugman who remain unimpressed.
In his point of view, cryptos do not represent the next step in monetary evolution but have, in fact, set back the monetary system by 300 years, according to a New York Times report. In addition, he seriously believes they could be dangerous as they are untethered to any real-world value.
Monetary Transaction Cost Has Always Been on a Decline
Paul Krugman is a Nobel Prize-winning economist and a well-known cryptocurrency critic. Cryptos might be supported by the latest blockchain technology, but as far as Krugman is concerned, digital currencies are actually pushing back the monetary system by three centuries. And it’s all because of those high transaction costs.
Historically, Krugman argues that monetary evolution has always been in the direction of “reducing the frictions of doing business.” In layman’s terms, the cost of producing and using currency has always been a decreasing trend throughout history, that is, until the arrival of cryptocurrencies.
For instance, producing early currencies such as gold and silver coins is a costly process as it consumed a lot of resources, and one needed a sizable security force to keep those piles of coins safe. Later on, bank notes backed by fractional reserves came into existence. They were easy to carry and cost even less to produce compared to gold and silver coins. And then the monetary system underwent another evolution — the introduction of checks and debit and credit cards, which further reduced transaction costs.
But Cryptos Jack Up Transaction Costs
And then cryptocurrencies arrived and reversed the trend of declining transaction cost. While Bitcoin was originally conceived as a mode of payment, not many people use the digital currency due to its high transaction cost. In addition, mining the crypto is not cheap. One has to buy expensive mining rigs and pay huger power bills to make it happen.
In a New York Times article, Krugman wrote:
“In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years. Why would you want to do that? What problem does it solve? I have yet to see a clear answer to that question.”
Absence of Tethering
Krugman is also not a fan of cryptos because of the absence of tethering. As far as he is concerned, these digital currencies have no underlying value, no tether to reality.
Some may argue that the dollar, as well as most fiat currencies currently in circulation, is in the same boat as cryptocurrencies — they are no longer backed by gold and silver. But Krugman insists that fiat currencies are actually backed by the government, which gets its money from taxes.
Clearly, cryptos do not have this backing. The danger is that a time might come when people start losing faith in cryptos. There’s a very real possibility that all those crypto holdings might become worthless.